We start another year facing an oversupply of capacity, leading to rating decreases and widening of terms and conditions. The response most often heard is simply to continue calls for underwriting discipline. Yet I believe, in the face of a cycle that shows no sign of turning, the answer lies not in addressing oversupply but in the potential that the huge unmet demand for insurance offers.
Demand that comes from the developing world’s chronic underinsurance and exposure to some of the most devastating natural catastrophe risks. In a recent report Swiss Re estimated that while 73% of the losses from the 2012 New Zealand earthquake were insured, just 1% of the damages from the 2015 Nepalese earthquake were insured.
At the same time, while the developed world may have a good level of insurance penetration for catastrophe property losses, technical, medical and societal change requires constant renewal and new development of insurance products to keep pace with an evolving environment, where sophisticated and often complex insurance cover is needed.
Bridging this gap between supply and demand can only be achieved by really understanding individual markets and delivering relevant insurance products that meet the end client’s expectations.
MGAs’ need to be at the forefront of these efforts and I believe they will play an increasingly leading role in industry innovation. Their generally low loss ratios and specialist nature also means MGAs’ have the potential to deliver excellent diversification benefits for carriers.
To fully exploit their position MGAs’ need to throw off the perception held by much of the insurance industry that they are just an additional distribution channel able to access profitable business. They need to assume their rightful role as innovators and leaders in their specialist niches.
MGAs’ proximity to the end insurance buyer makes them ideally placed to create and develop new and relevant products that their customers need.
Innovation can of course come in many guises and MGAs’ are able to lead in both developing new products for their customers and in implementing different and more effective systems for the better transaction of insurance. The success they have had in providing cost effective and specialist insurance cover for SMEs is an example of the value MGAs’ can add.
For established larger insurance businesses innovating can be a challenge. They are often encumbered by legacy systems, regulatory constraints, investor conservatism and weighty corporate structure and controls. These factors combined with a desire by many successful underwriters to focus on maintaining and growing existing profitable books often blunts demand for innovation in the development and testing of new ideas or products.
This is where the MGA model can bridge the gap.
Supporting MGAs’ offers carriers the opportunity to innovate without taking the sometimes daunting step of making an investment and being exposed to risk that could impact their own balance sheet. Entering a new line of business is expensive with significant upfront capital costs and no certainty of success.
Nimble MGAs’ are able to engender their own culture of innovation. By their very nature MGAs’ are focused on niche, specialist classes and the founding team tend to have a good understanding of the client’s needs. This makes them well placed to spot gaps in insurance cover and provides them with an ability to develop the flexible and responsive solutions their specific market requires. The words often used with innovation is “disruption” and again MGAs’ could be the ideal vehicles to test out and develop disruptive strategies.
While the London market and Lloyd’s have always been seen as the most dynamic source of insurance entrepreneurialism based on its depth of talent, expertise and experience, as the market has become increasingly managed by larger insurance groups and subject to greater regulatory and financial constraints, MGAs’ have had to take up the innovation baton.
It is undoubtedly difficult to grow when market conditions are so tight. MGAs’ offer the ability to break free from this cycle and grow the demand side for insurance. MGAs’ support the traditional entrepreneurialism of the London market, by empowering underwriters and providing carriers with a well needed opportunity to grow through diversification. I believe that because of this we can expect to see continued exponential growth in the MGA market over the next few years.
John Holm has a strong background of corporate banking in the City, specialising over the last 30 years in relationship banking, debt origination, and M&A transactions in the insurance sector across the UK, Europe, Bermuda and North America.
After senior roles within RBS, National Australia Bank and Clydesdale Bank, John moved to a new role within Capita Insurance Services Ltd where he worked with start-up Managing General Agencies (MGAs), providing working capital, taking minority equity stakes and NED roles on behalf of Capita.
John moved to Asta in 2015 as MGA Executive, working on the development of Asta’s MGA platform and developing a new business pipeline of MGA investment transactions.
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